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UNITED STATES v. KLEINMAN

November 17, 1958

UNITED STATES of America,
v.
George KLEINMAN, Defendant



The opinion of the court was delivered by: ZAVATT

The indictment is in four counts, three of which (Counts One, Three and Four) were dismissed upon the motion of the Government made during the trial to the Court without a jury. The trial proceeded as to Count Two which charges that in 1950 the defendant filed a false and fraudulent joint income tax return on behalf of himself and his wife for the calendar year 1949, wherein it was stated that their net income for that calendar year was $ 6,141.69, and that the amount of tax due thereon was $ 621.12, whereas the defendant knew that their net income for that calendar year was $ 20,225.46, upon which there was owing to the United States an income tax of $ 3,955.78. The indictment charged the defendant with willfully attempting to evade and defeat a large part of the income tax owing by him and his wife in 1949, in violation of Section 145(b) of the Internal Revenue Code of 1939, 26 U.S.C.A. 145(b).

On January 10, 1956 the Government furnished a bill of particulars stating that its proof on its direct case would be based upon the 'net worth expenditure theory', and that it would show the defendant's approximate net worth at the beginning of 1949 to be $ 56,718.33, and at the end of 1949 to be $ 72,044.71. Upon the trial the Government sought to prove that the opening net worth of the defendant was $ 56,718.33, as stated in the bill of particulars (The defendant offered to stipulate to the accuracy of this figure. Inasmuch as it was to the defendant's advantage to have the Government's opening net worth figure as high as possible, the offer to stipulate is not viewed as an admission of the items of which this figure was comprised.), and that his taxable income for 1949 was the difference between this figure and an asserted closing net worth of $ 71,044.71, plus the amount of $ 6,899.08, which the Government contended and the defendant did not deny to be the defendant's estimated living expenses in 1949. In other words, the Government sought to prove that the defendant's taxable net income in 1949 was $ 21,225.46, and that after reporting income of $ 6,824.10, the defendant had an unreported income for 1949 of $ 14,401.36.

The net worth method of proof has been described in Holland v. United States, 1954, 348 U.S. 121, 75 S. Ct. 127, 99 L. Ed. 150, as being employed in a typical prosecution in the following manner:

 '* * * the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an 'opening net worth' or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income. In addition, it asks the jury to infer willfulness from this understatement, when taken in connection with direct evidence of 'conduct, the likely effect of which would be to mislead or to conceal." 348 U.S. 121, 125, 75 S. Ct. 127, 130.

 It was pointed out in Holland that the pitfalls which are basically inherent in such a method of proof of tax evasion require the exercise of great care and restraint in its use. Despite the permissible use of the method it must be remembered that 'the Government must still prove every element of the offense beyond a reasonable doubt though not to a mathematical certainty. The settled standards of the criminal law are applicable to net worth cases just as to prosecutions for other crimes.' 348 U.S. 121, 138, 75 S. Ct. 127, 137.

 It is firmly established that increases in net worth, standing alone, cannot be assumed to be attributable to taxable income; that there must be evidence to support such an inference. In Holland it was held that it is sufficient for this purpose for the Government to prove a likely source of taxable income from which a jury could reasonably find the net worth increases sprang. In United States v. Massei, 1958, 355 U.S. 595, 78 S. Ct. 495, 2 L. Ed. 2d 517, it was stated that there would be no necessity for proof of a likely source in a case in which the Government could negative 'all possible sources of nontaxable income.' And in United States v. Adonis, 3 Cir., 1955, 221 F.2d 717, it was held that the defendant's deliberate falsification as to alleged nontaxable sources of receipts to explain large expenditures or accumulations was a legally acceptable circumstantial showing that the funds acquired during the taxable year were derived from taxable income. Furthermore, as pointed out in Holland:

 'The statute defines the offense here involved by individual years. While the Government may be able to prove with reasonable accuracy an increase in net worth over a period of years, it often has great difficulty in relating that income sufficiently to any specific prosecution year. While a steadily increasing net worth may justify an inference of additional earnings, unless that increase can be reasonably allocated to the appropriate year the taxpayer may be convicted on counts of which he is innocent.' 348 U.S. 121, 129, 75 S. Ct. 127, 132.

 That is, there must be a basis for concluding that unreported income was realized in the year for which the prosecution was based and was not acquired in any earlier year, United States v. Adonis, supra, 221 F.2d 721, for, as stated in United States v. O'Malley, D.C.E.D.Pa.1955, 131 F.Supp. 409, 414:

 'The defendant may well have over a period of years substantially increased his net worth and on a basis which may have involved understatement of taxable income. However, in a criminal prosecution for income tax evasion in a particular calendar year, the Government is not permitted to allocate summarily such unaccounted-for accretions to a particular year without meeting the requirements laid down in the Holland and Adonis decisions. * * *' In the instant case the Government proved that the defendant's net worth as of December 31, 1943 was $ 2,180.72. It claimed that its evidence established annual increases in his net worth thereafter as follows: 1944 $5,292.67 1945 8,583.57 1946 14,538.25 1947 12,551.17 1948 13,571.95 1949 14,326.38 The Government did not show the defendant's living expenses in the years 1944 through 1948. It was shown, however, that the Government's claimed net worth increases in those years exceeded the defendant's reported income for those years in the following amounts: 1944 $1,943.64 1945 4,495.74 1946 9,890.57 1947 7,448.59 1948 7,489.15

 As stated previously, the Government claimed that the defendant's living expenses in 1949 plus his claimed net worth increase in that year exceeded his reported income for that year by $ 14,401.36.

 The defendant's father, Bernard Kleinman, died in 1954. Beginning in 1944, and throughout the years from 1944 through 1949, savings bank accounts were opened in the father's name. Approximately $ 55,000 was deposited in these accounts during these years, and from these accounts approximately $ 50,000 was subsequently, and within the years mentioned, transferred to the defendant or to members of his family. This was accomplished in part by the transfer of cash by check from Bernard Kleinman to the defendant and members of his family, and in part by the transfer of assets from Bernard Kleinman to the defendant, which assets had been purchased with funds deposited in these savings bank accounts. It was the Government's theory that all of the deposits made in the name of the defendant's father were, in effect, additions to the defendant's net worth, i.e., that the funds belonged to the defendant from the dates of deposit, and were merely held in the father's name. It was the Government's foremost burden, therefore, to establish this element of its case by affirmative proof. The inference that an increase in net worth may be equated with unreported income in a given year must rest at least upon a clear and convincing showing that the items claimed in the Government's net worth computation are in fact the assets of the defendant. All of the cases which have come to the Court's attention support this conclusion.

 In Adonis, upon which the Government relies, the Government proved that in 1948 the defendant expended amounts aggregating some $ 44,000 for the purchase of a parcel of land and the building and furnishing of a home thereon. The Court of Appeals for the Third Circuit noted that 'The evidence of the payment of this much money in 1948 for land, building and furnishings was clear, precise and uncontroverted.' 221 F.2d 717, 718. In United States v. Ford, 2 Cir., 1956, 237 F.2d 57, vacated upon suggestion of mootness, Ford v. United States, 1957, 355 U.S. 38, 78 S. Ct. 114, 2 L. Ed. 2d 71, the Court was of the view that the specific items reflected in the Government's net worth chart 'were based on undisputedly sufficient evidence.' 237 F.2d 57, 59. And it is later noted in the same opinion that the figures noted on the Government's net worth chart 'were independently supported and were never challenged.' Ibid., 63.

 In the instant case the defendant was employed as an agent of the Internal Revenue Service from 1935 until 1951. It should be stated preliminarily that this is a case involving no specific items of allegedly unreported income. It appears that the defendant filed returns for and paid income taxes upon his salary as an agent and upon capital gains, interest and dividends earned by him during these years.

 With regard to a possible source of income to support an inference that the defendant acquired legally or otherwise, the funds which found their way into the Bernard Kleinman accounts, there has been an insinuation pervading this proceeding that such funds are the fruits of the defendant's graft-taking. To begin with, it has never been suggested that the defendant had any other lawful occupation or business, disclosed or undisclosed, from which such funds could have derived. The failure of the Government's investigation to uncover any such occupation or business excludes a hypothesis that the defendant's alleged affluence may be attributable thereto. On the other hand, a theory that the defendant accepted bribes appears to be that upon which the Government conducted its investigation. The Special Agent who investigated this case testified that he examined taxpayer's returns which had been audited by the defendant; that he spoke to some three hundred of such taxpayers, and investigated taxpayers who prepared returns audited by the defendant. No one was brought forward to testify that the defendant had taken a bribe or had offered to take a bribe. The Government in the late hours of the case candidly advised that it does not ask ...


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